India Minimum Support Prices: When politics beckons

Union Finance Minister Arun Jaitley has clarified that the 50 per cent minimum return to farmers promised by his government, while fixing the minimum support prices (MSP) for crops, will be over their average “A2+FL” production costs. This cost includes all paid-out expenses incurred by the farmer — on seed, fertiliser, pesticide, fuel, irrigation, hired labour and other inputs — plus an imputed value of unpaid family labour.

Given that the “A2+FL” cost for paddy was estimated by the Commission for Agricultural Costs and Prices (CACP) at Rs 1,117 per quintal in 2017-18, its MSP for the coming kharif season can be safely assumed to be close to Rs 1,700. That would work out Rs 150 more than the current MSP of Rs 1,550 per quintal for common paddy, while substantially higher than the average annual raise of Rs 60 given during the first four years of the Narendra Modi government.

The accompanying table shows that the average MSP hike in paddy under this government’s tenure so far, has been lower than the respective increases of Rs 70 and Rs 82 during the first and second innings of the previous Congress-led United Progressive Alliance (UPA) regime. Even for wheat, the average increase in MSP over the first four years of the Modi government, at Rs 83.75 per quintal, is higher than that during UPA-2 (Rs 64), but below the Rs 90 under UPA-1.

That could, however, change in the last year of this government, ahead of the 2019 Lok Sabha elections.
Guaranteeing 50 per cent return over “A2+FL” costs — implementing it face to face “C2” production cost, which also covers rentals/interest foregone on owned land and fixed capital assets, is fiscally unviable — would result in the MSP of paddy going up by at least Rs 150 per quintal. In wheat, the current MSP of Rs 1,735/quintal is already more than twice the “A2+FL” production cost of Rs 817 projected by the CACP for 2017-18. A significant hike may not be warranted then.

But even there, a significant revision in policy cannot be missed. In June 2014, the Modi government issued a communication, cracking down on state governments that were declaring bonuses on top of the Centre’s MSP. The states were told that in the event of paying bonuses — the BJP-ruled Madhya Pradesh (MP) and Chhattisgarh were giving farmers Rs 150 and Rs 300, respectively, over and above the then MSPs of Rs 1,400 and Rs 1,310 per quintal for wheat and paddy — the Centre wouldn’t procure beyond their internal public distribution system requirements. Any surplus grain procured would, then, have to be disposed of by the states themselves, who were to also “bear the financial burden in that regard”.

On Monday, however, MP Chief Minister Shivraj Singh Chauhan announced a Rs 200/quintal bonus to farmers in the state for the 2016-17 wheat and the 2017 kharif paddy crops already procured from them. The extra payment in this case – on 67.25 lakh tonnes (lt) of wheat and 16.59 lt of paddy — comes to over Rs 1,675 crore. He further promised a bonus for this year’s wheat crop — to ensure an effective procurement price of Rs 2,000/quintal, against the Centre’s MSP of Rs 1,735. This, too, will be paid after the marketing season ends in June, well in time for the Assembly elections scheduled for November-December.

The above overturning of a hitherto conservative MSP policy has clearly the Centre’s concurrence.